Short Term Thinking

We’re back to Covid times, when governments gave away money, careless of when or if the bill would be paid. Sunak looks like a miser by comparison with Australia’s incoming Labor government, which plans to pay for up to 40% of a new home. Governments have become lavish with handouts, and the era of easy money appears far from over.

Around £5 billion of Sunak’s give-away will come from what he called a “temporary targeted profits levy” on energy companies – a euphemism for a ‘windfall tax’, which the governing Conservative Party for months set its face against. Denying he was making a U-turn, Sunak said “we should not be ideological about this, we should be pragmatic”, and said this is a “solid sticking plaster”. Solid or not, it’s still a sticking plaster – it doesn’t treat the wound. He may help the poor but risks drowning everyone in debt, out of control inflation, and money that’s losing its value. It’s short-term thinking.

Free money for all

The wholesale price of natural gas has risen in the UK by 335% in the past 12 months. The Resolution Foundation, a British think-tank which aims to “improve the standard of living of low- and middle-income families” reckons that almost 10 million families in England will be in fuel ‘stress’ come winter, which it defines as spending at least a 10th of their total budgets on energy bills. Discounting possible exaggerations, some in the UK will struggle with the ‘heating or eating’ dilemma later this year.

In February this year, Sunak announced a £200 loan for every household to ease the pain of rising energy bills; he’s now doubled that amount (why not triple it?) and has scrapped the need to repay it. Eight million “low-income households” will get £1,200 ($1,509) this year. Every household, regardless of wealth, will get a £400 ($505) payment. The Sunday Times ‘rich’ list puts Sunak and his wife’s wealth at £730 million ($922 million); he has said he will be donating his £400 to charity. Boris Johnson, Prime Minister, will also get £400, although he has declined to say he will give the money to charity. If the UK had a Central Bank Digital Currency (CBDC) then perhaps this freebie could be better targeted, and not land in millionaires’ bank accounts?

Cynics suggest Sunak’s altruism might have as much to do with Prime Minister Boris Johnson’s wish to avoid a voter backlash for allegedly breaking Covid-19 ‘lockdown’ rules. Many UK citizens are battling the cost of living ‘crisis’; some 20% of Brits are struggling ‘to pay their bills’ according to one opinion poll.

Source: British Gas

Who is to blame for this bout of inflation, the highest in four decades on both sides of the Atlantic? Not the Russian army, although it hasn’t helped – energy prices were going up before 24 February, when it invaded Ukraine. Could it be the supposedly greedy energy companies, who now face a time-limited windfall tax of 25%? Not really – natural gas and crude oil prices are set in an international futures market, with a myriad of different types of participant. This market responds to a wide range of factors such as supply and demand, as well as speculative ‘investors’ hoping to make money. Could it be China, the world’s workshop, where city-wide Covid-19 ‘lockdowns’ have disrupted global supply chains? Or maybe our governments bear some responsibility?

That’s certainly the view of Mervyn King, former governor of the Bank of England (BoE). In his words: “governments stepped in and put in a lot of money for furlough schemes or raising unemployment benefits. That was very sensible… The problem was that central banks also printed a great deal of money and that wasn’t needed… it put a lot of money into the system”. The US Federal Reserve created about $4.8 trillion. In the UK, the government added billions to the money supply; around £3 trillion is now circulating.

It’s only money

So far, including measures announced earlier this year, the UK’s unbudgeted spending amounts to £37 billion. Sunak has said the inflationary impact will be “minimal”, “much less” than 1%. The windfall tax will help, but more than £30 billion will need to be borrowed or created and added to general government gross debt, which at the end of 2021 stood at almost £2.4 trillion, equivalent to 102.8% of gross domestic product (GDP).

It’s possible that Sunak will do another emergency package in 2023. We must all hope that he doesn’t, or that if he does it will ensure that any give-away is directed to people who really need it, and perhaps tie it to the bills they face.

Even those of us who don’t have university degrees in economics have probably heard the classic definition of inflation – too much money chasing too few goods. Giving away ‘free’ money to the poorest in society is undoubtedly the morally ‘right’ thing to do. But put together inflation forecasts of 10% in the UK by the end of this year; the estimated loss to British taxpayers of almost £5 billion from fraud and error in a government Covid-19 support scheme ; a budget deficit of some £318 billion (in 2020/21), equivalent to almost 15% of gross domestic product (GDP) and around £4,800 per capita, a peacetime record; and giving £400 to every household, no matter whether they need it or not, just seems crazy.

Not all of the £15 billion will be used to pay energy bills. Sunak may help save the poor but the risk is that he sinks everyone further into the debt & inflation mire, further eroding the value of the Pound – which by the end of this year is likely to have lost 10% of its purchasing power.

Prices still bubbling

In the US, prices were 8.3% higher in April than a year ago, a slight reduction from the previous month’s 8.5%. The Federal Reserve long-term inflation ‘target’ of 2% per year is likely to be out of reach for months, if not years. Despite official suggestions that inflation in the US is due to ‘supply chain’ problems, or people not returning to work after Covid, it’s has been driven largely by the Federal Reserve. Between March 2020 and the end of 2021 the Fed increased the M2 measurement of money supply (which includes cash in circulation, and check and savings accounts) by 42% in just 22 months, putting $6.4 trillion into the US economy.

The Federal Reserve succumbed in the Covid-19 pandemic to short-term thinking – in the early days when deaths were mounting and no vaccines were available, governments panicked and locked us all down. Many of us could not go to work. There was a generalised sense that ‘government must do something’ – and it did. In the US, it sent about $11,400 to an average family of four, regardless of job status. In the UK, this kind of short-term, knee-jerk government thinking can be seen in Sunak’s latest give-away. The British government has given an estimated £169 billion ($213 billion) to its citizens and businesses.

Opinions are deeply divided as to what has caused this inflation. Fundamentally however, the blame must be shouldered by governments who did not feel or did not make time for any long-term thinking – they preferred to inject massive amounts of cash into their economies to make voters believe they were being cared for. Politically this was no doubt necessary. Morally it was easily justified. Economically, it will in retrospect come to be seen as a huge mistake, vastly disproportionate. The Obama administration’s stimulus package for the 2008 recession was $787 billion; the pandemic stimulus packages, between the Trump and the Biden administrations, reach around $5 trillion. Some economists predict that the US will “likely see” an increase in its “overall price level of approximately 27%” over the next few years, with the magnitude of the price rise being “a function of the amount of excess broad money that has been created in the past 18 months”.

Fiat money will continue to see its purchasing power wane. Confidence in the managerial competence of governments will become more fragile.